Auditor Change and Management's Issuance of Earnings Forecasts

• In Event: Management Forecasts and Analyst Conference Calls

Abstract

Auditor changes transmit negative signals about client firms’ financial reporting process and quality, inducing investors to discount the firms’ financial disclosure credibility. We predict that as investors perceive disclosures as less credible following auditor changes, managers tend to disclose less. As expected, we find that auditor changes negatively affect managers' inclination to issue management earnings forecasts (MEFs) and the impact is not due to correlated omitted variables, reverse causality, or endogenous self-selection. In testing the underlying channels, we find that (1) different auditor change characteristics lead to different outcomes for MEFs as predicted by the auditor change signals and the audit quality effect, (2) factors that can enhance MEF credibility, such as board monitoring, attenuate the negative impact of auditor changes, and (3) auditor changes reduce market reactions to forecast releases. The overall evidence suggests that auditor changes affect MEFs through reduced credibility of disclosures.

Author

• Yonghong Jia, Iowa State University